Restraints of Trade (Update)

Over the past 12 months the Labour court has seen a vast increase in restraint of trade cases as opposed to the High court where these matters would normally be dealt with. The Basic Conditions of Employment Act (The BCEA) gives the Labour court concurrent jurisdiction with the civil courts to hear and determine any matter concerning a contract of employment, irrespective of whether any basic condition of employment constitutes a term of that contract (Section 77(3) of the BCEA). Even though the Labour court is in itself a more equity driven court, the principles of restraints of trade have not changed, and restraints must always be seen as serious and should not be considered unenforceable.

What is a restraint of trade?

A restraint of trade is an agreement between an employer and employee which sets out that if the employee leaves the employer, the employee will not become employed or associated with a competitor of the employer within a specified area and for a specified time. The restraint of trade will commence at the date of termination of the employee’s employment with the employer or on a date agreed between the parties.

How does one determine if a restraint of trade is enforceable or not?

A party seeking to enforce a restraint of trade will have to prove the existence of the restraint of trade agreement and also show that it has been breached – ie. that the employee signed a restraint of trade and has since left the employers employ and has become employed or associated with a competitor. A restraint of trade will only be enforceable if the employer can show that it has a ‘protectable interest’ which is legally recognised and deserving of protection. This would be two fold – 1. that the employee in question was privy to confidential information whilst employed which could be used by a competitor to gain an unfair advantage in the marketplace, and/or 2. That the employee in question developed relationships with customers, potential customers, suppliers, and other related parties that go to make up what is known as a trade connection of a business, which could be used to gain an unfair advantage in the marketplace. The employer must then show that the employee has or will use the confidential information or trade connections since leaving the employer to gain an unfair advantage and has therefore breached his/her restraint of trade undertakings and should be restrained.

How long and how wide are restraints of trade?

Restraints of trade will only be enforced for a period of time which the court deems reasonable and will only be enforced in areas which need to be protected. An example would be a restraint of trade which is enforced in the whole of the republic of South Africa for a period of one year because the employee in question operated as a sales manager and serviced clients throughout South Africa. In this case the party enforcing the restraint would argue that to mend or maintain its relationships with these clients would take up to 12 months and therefore a 12 months restraint is reasonable. Another example would be a restraint of trade which is enforced only in the province of Gauteng or Johannesburg for a period of 6 months as the former employee only operated in Gauteng and had limited dealings with customers. Another example would be a restraint which is not enforced at all by the court despite being in existence due to the fact that the former employee was not privy to any confidential information and did not have any trade connections.

Conclusion

Every situation is different and whether or not a restraint of trade is enforced entirely, whether the restraint of trade is reduced, or whether the restraint of trade is not enforced at all, is all dependant on the circumstances of each matter. Parties are advised to seek proper legal advice whenever an issue regarding a restraint of trade arises.